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January 2, 2013

PIMCO’s El-Erian: Fiscal Cliff Deal Makes Little Economic Sense

Political compromise does little to address growth, corporate investment and job creation

PIMCO's Mohammed El-Erian. (Photo: AP)

PIMCO CEO Mohamed El-Erian doesn’t think much of the last-minute deal struck by Congress to avert the fiscal cliff. Specifically, he argues the political compromise does little to address “the consistent headwinds that undermine growth, hold back corporate investment, and dampen job creation.”

“The compromise reached by Congress, after multiple rounds of painful negotiations, makes some political sense,” El-Erian notes in a column posted to CNNMoney on Wednesday. “The economic benefits are mixed, at best. The social dimension is notable, but will need to be quickly reinforced by measures to reinvigorate economic growth and job creation.”

El-Erian, recently named by President Barack Obama recently to head the U.S. global development council says the political attractiveness of the deal comes from the fact that both parties, and virtually every faction within each party, can claim at least a partial victory.

“Led by a determined President, Democrats restored the pre-Bush tax rates on higher earning individuals and couples,” he adds in a nod to his new boss. “In the process, they delivered on one of Barack Obama's most important and consequential election promises.”

The economic attractiveness of the deal is much more problematic, he notes.

“On the positive side, the compromise averts a mix of tax increases and spending cuts that would have done more harm than just push the nation into another recession. It would have also seriously undermined the hard-earned healing occurring in the housing sector and in many families' stretched balance sheets. With that, our economy would have experienced a significant air pocket, and would have faced an even more difficult subsequent recovery.”

However, his enthusiasm is tempered in noting that as important as this gain is, it is unfortunately not overwhelming.

“If the objective were to promote employment, the nation's most urgent challenge, the compromise prolongs crippling political uncertainty rather than removes it. … If the objective were medium-term fiscal reform, then there is no meaningful content in the fiscal cliff deal. Many longer-term budgetary issues remain unresolved. … If the objective were to place a down payment on all this pending, full delivery of comprehensive policy initiatives, the tone coming out of the negotiations suggests rougher, rather than smoother, sledding ahead.

“Finally, if the objective were to provide the economy with some short-term breathing space, what came out of Congress serves to somewhat diminish what is already a rather sluggish growth momentum.”

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